The strategy on US equities for the week ended 4th September was to cash-out on extended rally as the last mile journey into untrodden territory got euphoric despite caution from the FED on the overheated equities valuation. It turned out to be validation of strategy to trim portfolio risk-weight from heavy to zero-light at 0-15% of portfolio value. Following the collapse, undertone shift to sell-on-recovery towards 3rd September high for extended correction below 4th September low. There’s no need to panic to take focus towards 2019 close – (February) 2020 low, when FED stays in ultra accommodation mode for extended period of time, and no significant impact expected on financial markets between Trump 2.0 or Biden 1.0!
NASDAQ was not expected to hold over 12000 for value normalisation to 11000-11350, and collapse from 12074 to 10875 got overdone before good sense prevailed for close at 11313. What Next? Close below 11695-11775 is negative with high probability of end of FED-triggered 6631-12074 rally by 82%, and by 35% over 2019 close 8972. If this is not good for investors when the economy is in big time contraction, it’s something beyond greed. For the week, consolidation at 10875-11500 is preferred outlook with sell-on-recovery mode at 11500-12000 and value-buy portfolio build from 0-15% to 25-50% at 10000-9350.
S&P 500 was seen to be hot to hold above 3500 for push back below 3350-3400 and got the push back from 3588 to 3349 before close at 3426. Here again C-19 stimulus rally from 2191 to 3588 by >60% is best opportunity to cash-out. Close below 3500 is first signal of best of 2020 is behind, but expected to stay above 3000-3100 against portfolio-light supply at 3500-3600.
DJIA Index got to the striking distance (high 29199) of February 2020 high 29569 only to get pushed back to 27664 before close at 28133. Here again, the outlook was failure above 29000 for push back into 27000-28000. For the week, let’s set zoom-in focus at 27000/27500-28500/29000, either way overshoot not expected to sustain.
US 10Y Treasury yield was expected to in back & forth mode at 0.575/0.65-0.775/0.85% post push back from portfolio light zone 0.50-0.575%. It’s been 0.79% to 0.60% to 0.72%. Given that FED is expected to be in rate-pause stance beyond 2020-2021 and not ruling out shift from above to below 0% on FED Fund rate, don’t see sustainability of weakness into 0.85-1% nor sustainability of gains into 0.35-0.50%. Given that US equities is already into value normalisation mode, it’s impact neutral from shift of appetite from equities to safe haven & low risk Gilts.
USD Index DXY outlook was for consolidation at 91.50/91.85-93.15/93.50 with upward bias, and got the recovery from 91.75 to 93.24 before close at 92.72, midpoint of short term big picture 90/91.50-93.50/95. Retain outlook that shift from 91.50-92.50 into 93.50-94.50 is work in progress, but don’t see cues as yet for upside break at 94.65-95.
EUR/USD outlook was failure at upside break at 1.1650/1.1725-1.1925/1.2000 and extended recovery into 1.1965-1.2085 not expected to sustain. EUR/USD got sold off from 1.2012 to 1.1781 before close at 1.1838, around midpoint of short term comfort range 1.1650-1.20 and continue to stay focused here, not ruling out weakness into 1.15-1.1650 which is not expected to sustain.
USD/JPY is boxed at no-man’s zone 105-106.50 (105.29 to 106.50 before close at 106.25. Retain pull bias into 107-107.50 while 105-105.50 stay firm. In the big picture, not beyond 103.50/105-107/108.50
Gold outlook was for consolidation, heavy at $2000-2035 & supported at $1865-1900, and saw intra-week drift down from $1992 to $1916 before close at $1934. Don’t see fresh cues to review risk-neutral outlook between $1865-1900 and $2000-2035 keeping 2020 high $2075 out of radar for now.
Brent Crude drift down from $45-47.50 to $40-42.50 against contraction of global economies is not surprise and consolidation around intermediate zone $40-45 of comfort range $35-50 is the best outlook for rest of 2020, risk only from geopolitical tensions, which are not expected to emerge while the US presidential elections gain steam.
Overall, start of September is worst for the bulls that were into extended chase unmindful that the reversal will get into kind of waterfall, higher it goes beyond tolerance levels. Given the higher probability that 2020 high is behind on equities, undertone will be between value normalisation in alignment with the real economy (high dependent on Covid vaccine) and sell-on recovery to lock-in decent YoY gains, being prudent and happy to make positive returns in 2020!
Have a safe week ahead!
Moses Harding
